The December Australian Dollar and New Zealand Dollar soared on Wednesday thanks to strong demand for risk after Moody’s maintained its investment grade rating on Spain. Investors chased the higher yielding currencies as an expression of relief that Spain was not downgraded to junk status by the rating agency.
This trend could continue amid growing optimism that Madrid is moving closer to making a formal request for a financial aid from the European Union. This move would open the door for the European Central Bank to begin its bond-purchasing campaign.
While the rise in both currencies represents a strong reaction to a news event, longer-term traders cite the slow down in the Chinese economy as one factor that could derail the current rally. Additionally, the Reserve Bank of Australia is likely to maintain its dovish assessment of the economy given the uncertainty in China and Australia when it meets on November 6 and releases its statement on monetary policy on November 9. Traders are looking the central bank to cut its benchmark interest rate another 25 basis points, a move that could pressure the currency once again.
Besides the central bank meeting early next month, Thursday’s release of key Chinese economic data could stop the current rally in its tracks if they show continued weakness. Thursday’s reports include third-quarter gross domestic product and September industrial production.
Technically, despite the Australian Dollar’s 7-day rally, the main trend remains down on the daily chart since the market has not crossed a swing top. The main trend will turn to up when 1.0406 is crossed. The absence of a higher-bottom also suggests that this rally is being fueled by short-covering.
Based on the main range of 1.0537 to 1.0089, the key retracement zone is 1.0313 to 1.0366. On Wednesday, the Australian Dollar penetrated the lower boundary or 50% level, but fell short of a full Fibonacci retracement. This is typically an area that attracts fresh shorting especially when it is coupled with a downtrend.
Upside momentum was strong on Wednesday as demonstrated by the breakout over the downtrending Gann angle at 1.0297, but a break back under this angle could be a sign that short-sellers are taking control of the market once again. Uptrending support is at 1.0249 today. This Gann angle is guiding the market higher.
The rally could come to an end if sellers show up inside the retracement zone; however, a breakout over this zone could trigger a surge into a slow-moving Gann angle at 1.0417. Traders should watch how the December Australian Dollar reacts to the Chinese economic data especially since it has completed a normal retracement in a bear market. It could be setting up for another move to the downside.
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